In his speech and interaction with Rob Wolcott, Efosa Ojomo talks about the characteristics of the consumption and non-consumption economies and ways to drive innovation to include access to the latter.
There are two economies at play, the consumption economy and the non-consumption economy. If the whole population could be represented in three concentric circles, there is one small circle of the population that has access to a lot of money and skills. They constitute the smallest population in the country or a region, and as the circle gets progressively larger, more people are coming into the circle who have less money, less wealth, less skill, and less access. The largest circle comprises the greatest number of people, and they are the ones with the least access. In other words, non-consumption can be seen more as we go into progressively larger circles.
In almost every industry at the onset, the products that are introduced, are introduced to people and organizations in the smallest circle because those are the people who have access to money. They have access to skill, wealth, and so on. But over time, we have seen the democratizing effect of innovation, which then seeps into other circles. It can be better understood with the example of AT&T. In the late 1980s, AT&T was a big global telecommunications company, which contracted with a consulting firm to have them estimate how many mobile phones there would be in the world around the year 2000. The consulting firm put the estimate at 900,000 mobile phones. Taking into account the technology at the time and investments they would require, AT&T decided it was not worth it. It turns out that at the turn of the century, there were about a billion mobile phones in the world and over 100 million in the U.S., but AT&T had already let go of that opportunity. The number of mobile phones exceeded the estimates because of the democratization of innovation that made it accessible to a much larger population.
In almost every industry at the onset, the products that are introduced, are introduced to people and organizations
The consumption economy is very visible, as can be understood from the story of AT&T. We see the way people consume things, and we measure the disposable income of people, GDP growth, population growth, discretionary spending, etc. and get an idea of the market size. But the non-consumption economy consists of people who cannot consume products or services because there are barriers that prevent their consumption. Hence, oftentimes, we don’t think about those people as potential or possible consumers, which is why an organization like AT&T’s estimate of the number of mobile phones in the world could be so far below the actual figures. They were only looking at the consumption economy. They were looking at consumption the way it currently happens, and not looking at non-consumption and their ability to convert that into consumption.
In the book The Innovators Guide to Growth, Scott Anthony, et al. describe four main barriers to consumption. The first is access. The product is just not available in your locale. For example, back in the day, one had to go to a big printing station to print something because people did not have personalized printers. The second barrier is time. This is when using a product or service on the market takes too much time. The third barrier is money. It is often the most obvious barrier, but it is not the only one.
The fourth barrier is skill. Skill does not necessarily represent major technical skills. It just represents an ability for the consumers to understand very simply how to consume the product. For example, a company called MicroEnsure provided a free insurance service to some of its customers in an African country, and enrolment only required one’s name, date of birth, and next of kin. The company found out that 80% of people dropped out when they got to that stage of signing up for the service. It was because many people did not know their date of birth, or were apprehensive of choosing the next of kin whose name they should submit. Here, a free product does not get consumed because of the lack of skill. Therefore, as organizations begin to assess themselves and the products they are putting into the market, the question is what are the barriers slowing down or preventing consumption for their users or their customers? Any innovation that wants to increase consumption has to consider this.
With each progressive innovation, there has been an expansion of the market that made the product that was previously complicated and expensive, simple and affordable. In so doing, we have got a whole new population of people who can now get access to it. An example is that of computers. Over the last 70 years, computers have gone from large mainframe machines that would cost millions of dollars to progressively less expensive, less complicated products and services that all of us or at least a majority of us could use. It is now a pocket-sized device that people can carry with themselves.
The question then becomes, what are the different types of innovations? The first type of innovations are the ones that transform complicated and expensive products into products that are simple and affordable, and these are called market-creating innovations. Market creating innovations target the non-consumers, the people who would benefit from using a product or a service but they cannot afford it due to consumption barriers. Market creating innovations are powerful in that they not only create new growth engines for companies but they enable significant development in the regions where they are implemented. They have the power to create prosperity for a whole nation.
With each progressive innovation, there has been an expansion of the market that made the product that was previously complicated and expensive, simple and affordable.
The second type of innovation is sustaining innovations. These are performance improving innovations that make good products better. They are targeted at existing customers and do not expand access to new customers. By enhancing the features and benefits of a product, organizations are only competing with the existing players in the market. From a development standpoint, they are somewhat neutral.
The third type of innovation is called efficiency innovation. These are innovations that enable companies to do more with less. When organizations lay off a lot of people so that they can manage the numbers, when organizations invest in newer technologies to reduce the cost of operation and not necessarily the price of the product, these are efficiency innovations. The efficiency innovations release cash flows, and so they are important, especially during this crisis, but they cannot give organizations a long-term growth strategy because efficiency innovations are typically targeting customers in one circle.
No innovation is bad in and of itself, but it is important to understand how all these innovations within an organization should define an organization’s R&D or innovation portfolio. Organizations should always be thinking about what kind of innovation they are working on, whether it will expand access to non-consumers or not, and how they can leverage existing technology to do that. If the strategy is focused on sustaining and efficiency innovations primarily are, then it is not going to be a long-term strategy.
After the COVID pandemic, there are going to be many more non-consumers in the world, many more people who are not going to have access, whether it is the money, the time, the availability in their space as businesses close, or the skill to afford existing products on the market. We should therefore begin thinking of new opportunities for market-creating innovations that will emerge out of this global pandemic. Organizations should begin thinking in this direction so that we can get the world back to where it was and beyond. Lastly, whether it is innovation or strategy operations, at the core, the question we have to ask ourselves is how are we making life better for other people by what we are doing?
Organizations should always be thinking about what kind of innovation they are working on, whether it will expand access to non-consumers or not, and how they can leverage existing technology to do that.
Rob Wolcott in Conversation with Efosa Ojomo_
Rob Wolcott: As a corporate leader, how do you commit resources in the long run in general, but especially when we are in a time of crisis?
Efosa Ojomo: That is hard. This crisis is unlike any that we have seen, so we must recognize the fact that many people have lost jobs and many more will. There are two things. The first is to use a tool called Aggregate Project Planning. As you are in good times, you have a portfolio of projects you are working on. The best thing you can do is to categorize projects into different buckets. The first would be breakthrough projects, which can be classified as market-creating and depending on the organization, you apply somewhere around 10% of your resources on that. The second category is platform type projects. These are projects that support your existing businesses, the foundation that makes them work, and you can apply about 30-40% of resources to that. The third bucket includes more derivative projects. These projects are your bread and butter, and so apply 50-60% of resources to that.
The key is in staying disciplined to those numbers because the profit you make when you are spending a lot of money on sustaining and efficiency innovations are very exciting, and market-creating innovations are not, so it is hard, but if you dedicate some resources to that, I think that helps. The second thing is to just understand what is the job to be done of people that you are trying to serve. If your organization is not well-positioned to serve the job for your customers or non-consumers, then you are at risk of getting disrupted by someone who does it better.
Rob Wolcott: What are some things you can do as a leader in an organization to help move the mindset of your colleagues?
Efosa Ojomo: I would change mindset to “foot-set”, and so the question to answer would be, where is the executive or where are the executives spending their time? If you run a big retail organization, and you are meeting with other executives, flying around consulting, and so on, then you can talk about breakthrough innovations all you want, but you are not close to the action if you are not in your retail sites. It is going to be hard for you to come up with new and insightful innovations. Therefore, it is really about looking at the proportion of time one is spending on work towards breakthroughs.
Some of the great innovators did this. For example. Akio Morita of Sony never hired a market research analyst. He went out and figured out what people are doing and how they are living their lives, and he came up with some of the greatest innovations the world knows today- the Walkman, portable transistor radios, portable sound recorders. He did that by looking at how people were living and identifying the struggles they experience and developed ways to reduce those struggles. Having an eye for what people’s struggles are and understanding what the job to be done is, can help.
Rob Wolcott: A lot of the problem comes in getting teams to focus effectively on things that matter because there is a lot of discrepancy between what needs to be done and what is happening. Leaders cannot know everything, so can you share any ideas about how to scan peripheries and focus attention?
Efosa Ojomo: You cannot know everything and you cannot do everything, so my recommendation would be that if your organization is doing things that seem too normal, you have to begin to do things that may seem abnormal. In the market creation process, one of the things we learned is that every single market-creating innovation we studied had to create an entirely new value network. They had to create an entirely new value chain, largely because the existing ones had a cost structure built into them that could only serve the consumption economy. When you have to create a new value network, you have to go out and look at what people are doing. So, it goes back to the idea of going out in your space, in your business, looking at what consumers, as well as non-consumers, are doing, understanding their specific struggles in their lives, and figuring out ways to integrate those things into that breakthrough of market-creating strategy that you are developing for your organization. At the onset, people are going to say that there is no way it can work, but that is a good signal.
Rob Wolcott: What is it about digital technologies that might be enabling new opportunities around market-creating innovations?
Efosa Ojomo: Think about digital technologies as infrastructure, because infrastructures enable a lot more consumption when there is pent up demand. If we look at many countries that have built out their highway systems or rail, we see that prices drop and consumption boom. An infrastructure is essentially the most efficient way society has figured out how to store or distribute value or distribute innovations. Digital technologies also enable us to store or distribute value. Digital platforms allow us to digitize any value that can be digitized. Knowledge, for example, can be digitized. So, if the value that your organization creates can be digitized, it would be wise to digitize it.
The interesting thing is, digital technologies are also now connecting to the analog or physical world. When our product or service is analog, the question now has to be, how to leverage digital technology to make the organization a lot more efficient, to get access to more people, and to improve the product? So, there are two things. If you can digitize the value you create, that is the route you should go. If you cannot, then find ways to leverage digital technologies to make things a lot more efficient.
Rob Wolcott: What is most interesting to you with respect to market-creating innovation opportunities going on right now in the developing world?
Efosa Ojomo: Pre-COVID-19, we were seeing a lot of companies leveraging digital technology, so there was a rise in FinTech companies. The reason they could do that was because there was a lot of pent up demand, and so the infrastructure in place stimulated a lot of innovation. Building infrastructure in the absence of demand would not have helped.
One of the interesting spaces I see is called micro-mobility, developed by Horace Dediu who also coined the term. If we look at people’s mobility habits, they often are not going very far, especially if they live in cities and so the idea of micro-mobility is around leveraging scooters or bicycles in cities to move around, and it is beginning to take shape. It is less expensive than cars, both monetarily and on the environment, and also takes less space. Another interesting space is in housing. Many people in the world do not have access to homes. A company called Botanica is trying to apply some of the mass production techniques seen in a factory to affordable homes so that they could get homes a lot quicker than just custom-building house.
Rob Wolcott: How did you get inspired and how did you end up on this wonderful track?
Efosa Ojomo: This work is very personal to me. I’m originally from Nigeria, and I immigrated to the U.S. in 2000 with a one-way ticket, and no intention of ever going back to Nigeria. For eight years, I didn’t go back but then in 2008, I started reading, I came across the books on development, poverty, economics and it gripped me as nothing had ever gripped me before. I started a non-profit organization, shortly after. I went to Nigeria every year after I read, and built wells. The wells would work for a while, and then they would break. I knew there was something fundamentally wrong with the conventional NGO model where we just provide resources. That led me to business school. I was fortunate to meet Professor Christiansen there, who took me under his wings and taught me a lot of what I know now, and just changed the way I think and see the world. He said, “Look Efosa, when you see people struggling that’s not a call for you to go, just provide resources and walk away. It’s a call for you to understand what the struggles are and figure out a way to develop a business model that can help them so that they develop capacity and they begin to solve their problems themselves,” and so he just changed the way I think and see the world.
Rob Wolcott: What three words would you use to describe how you feel about the future?
Efosa Ojomo: I’m a little scared, I’m hopeful, and I’m grateful. So, the three words would be scared, hopeful, and grateful.